Browsing by Author "Du Rand, Gideon Petrus"
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- ItemA microeconomic model of banking with a strategically determined interbank market(Stellenbosch : Stellenbosch University, 2020-03) Du Rand, Gideon Petrus; Georg, Co-Pierre; Du Plessis, Stan, 1972-; Stellenbosch University. Faculty of Economic and Management Sciences. Dept. of Economics.ENGLISH ABSTRACT : This dissertation generalizes the seminal model of financial contagion by Allen and Gale (2000) to allow an aggregate liquidity demand shock to occur with positive probability. A shock with positive probability can affect the ex ante portfolio choices of banks as well as the welfare of consumers. I numerically characterize the symmetric Nash equilibrium of the non-cooperative game between two representative regional banks. The solution fully characterizes banks’ exante optimal choices. I obtain the following results: (i) when the probability of the shock approaches zero, the allocation of Allen andGale (2000) is obtained; (ii) in general, the equilibrium has three distinct characterizations, depending on the parameters: a no-default equilibrium, where no bank defaults; a single-default equilibrium where only the shocked bank defaults; and amutual-default equilibrium, where the shock leads to contagion. When banks are able to internalize the ex-ante threat of a shock, contagion is rare: it is possible in, at most, 4% of the parameter space, and only for small shock probabilities. Additionally, optimal risk-sharing is studied analytically in two novel aggregate benchmarks: a global bank with full information and a global bank with asymmetric information. A global bank with full information can observe consumer types. The allocation of a global bank with full information involves default after a large but sufficiently unlikely aggregate liquidity demand shock. Where default is not optimal, the allocation involves (i) holding excess liquidity when the shock is relatively likely, (ii) partial liquidation of the investment after a small and unlikely shock, and (iii) both excess liquidity and partial liquidation for shocks of intermediate size and probability. Under asymmetric information, a global bank cannot observe consumer types, and can offer less liquidity insurance than under full information. Finally, when the numerically approximated Nash equilibrium is characterized by either no default or contagion, the decentralized solution attains thewelfare of the benchmarks within numerical precision. However, when the Nash equilibrium is characterized by single default, the decentralized equilibrium is superior to the aggregate benchmarks. Thus, a global bank with regional branches can be inefficient for certain parameters in this model, relative to independent regional banks.